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Housing Market Continues To Exhibit Bottoming Behavior

Today, the National Association of Realtors (NAR) reported an increase in existing home sales in April to an annualized rate of 4.62 million, meeting consensus expectations.

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, increased 3.4 percent to a seasonally adjusted annual rate of 4.62 million in April from a downwardly revised 4.47 million in March, and are 10.0 percent higher than the 4.20 million-unit level in April 2011.

Total housing inventory at the end of April rose 9.5 percent to 2.54 million existing homes available for sale, a seasonal increase which represents a 6.6-month supply at the current sales pace, up from a 6.2-month supply in March. Listed inventory is 20.6 percent below a year ago when there was a 9.1-month supply; the record for unsold inventory was 4.04 million in July 2007.

The following graph from Calculated Risk displays the long-term view of the existing home sales trend. Early this year, we observed that the housing market had begun to exhibit early signs of bottoming behavior and the consolidation formation in existing home sales that followed the bubble implosion continues to develop as expected.

 

 

The choppy downtrend in existing home inventory that began in 2007 continues to move lower, approaching 2002 levels.

 

 

As a result, the months-of-supply metric has returned to an area that is typically associated with a "healthy" market near the 6-month level.

 

 

During the summer of 2006, our analysis indicated that the top of the housing market was likely in place and we predicted several years of financial market turmoil as the most speculative real estate bubble in US history imploded. The initial phase of the secular decline in housing prices has proceeded exactly as expected since then and it has now been more than five years since the market turned down. Although this last bubble was unprecedented with respect to the speculative excesses that were introduced into the system, the ten-year housing cycle has been very reliable historically, so we expected the next bottom to form in late 2011 or early 2012.

Although real housing values have yet to form a confirmed bottom, we are seeing bottoming behavior in the data trends that usually precede the development of a low in prices. The following graph from Calculated Risk displays the long-term views of single-family home starts, new home sales and residential investment.

 

 

Notice that all three trends have been consolidating at current levels since 2010 following the violent declines from 2007 to 2009. This behavior suggests that price is preparing to bottom as well, although it is important to note that the developing cyclical low will almost certainly be very different in character from all of the previous "normal" lows displayed on the graph above. Again, the last housing bubble was the largest, by far, in US history as shown on the following graph of real home prices from HousingStory.net.

 

 

Home values will not rebound in typical fashion during the forthcoming cyclical uptrend. Instead, they will likely move sideways in a choppy consolidation formation as the market continues to integrate the massive oversupply introduced during the speculative frenzy of the bubble years. The healing process is underway, but it will take many years to repair the damage that was inflicted last decade.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.